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San Leandro has ‘cushion,’ but huge drop in sales tax revenue is expected

San Leandro officials said a decrease in sales tax revenues due to the covid-19 pandemic could exceed $10 million, rivaling the 26 percent drop it suffered during the Great Recession more than a decade ago.

“It’s so early and we don’t have perfect information about what the budget impacts will be, but I think I would be remiss if I didn’t say it is something that we’re looking at and that we’re concerned about,” San Leandro City Manager Jeff Kay said last week.

San Leandro traditionally leans heavily on sales tax revenue. Nearly 40 percent of the city’s $117 million general fund budget comes from sales tax receipts. When economic times are good, San Leandro’s revenues flourish. When they are bad, they suffer.

During the recent lengthy period of economic prosperity, San Leandro sales tax revenues have been robust, allowing the city to begin paying down its unfunded liabilities, green-light a number of large capital improvement projects, and amass a general fund reserve of $42.7 million, a sizable amount compared to many East Bay municipalities.

“That gives us a lot cushion to be able to make thoughtful, strategic adjustments rather than having to do anything quick and drastic in a panic,” Kay said of the general fund reserve.

But the rainy-day fund will surely begin decreasing over the upcoming fiscal year budget and, perhaps, several more, as economists debate just how bad the recession will be.

Going back to the Great Recession that began in late 2008 and lingered for several years after, places like San Leandro responded to mounting budget shortfalls by laying off city workers and cutting services. San Leandro’s sales tax revenue dropped by 26 percent over a two-year period, Kay said.

While the severity of the economic collapse due to covid-19 is unknown at this time, a similar decrease in sales tax revenue this time around would equal, at least, $10 million, and likely higher, Kay added.

“Obviously it’s a big deal if that were to happen,” Kay said. “I’m not forecasting that at this point, but we have never had an economic jolt quite like the one we’re having right now where so much of our business world ceases to function for a period of time.”

San Leandro’s sales tax revenues is not the only ledger expected to take a hit from the pandemic. Real Property Transfer Tax receipts, roughly $5 million in annual revenues the city receives after the sale of property, is expected to significantly dropped, Kay said. A similar fate will also likely befall its $1 million hotel tax fund.

The city’s finance department, working with consultants, are currently putting together several models that will give San Leandro elected officials a better snapshot of the current economic situation in coming weeks.